US Fed won't go negative: Capital Group

Market scepticism about the efficacy of negative interest rates makes it unlikely the US Federal Reserve will go down the same route as the Bank of Japan, argues Capital Group.

In a note to investors titled Negative rates and US credit outlook, Capital Group fixed-income investment specialist Eric Delomier said US Federal Reserve chair Janet Yellen has indicated negative interest is still "part of the policy debate in the US".

Asked about negative interest rates in February, Ms Yellen said: "[It is] something that, in light of European experience, we will look at, we should look at — not because we think there is any reason to use it, but to know what could potentially be available".

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But Mr Delomier said negative interest rates can create "significant unintended consequences" in practice, with banks very reluctant to pass on negative interest rates to individual depositors.

"That said, the global debate about negative interest rates will likely have meaningful implications for investors.

"While US yields are low by historical standards, the much lower alternatives available in other parts of the developed world are likely to support significant structural demand for US bonds from non-US investors.

"Considering interest rates and yields are negative on most government bonds with a maturity lower than 10 years in Japan, Germany, France and Sweden, investors in those markets ought to find the US bond market quite attractive," Mr Delomier said.